Tips for investors to ease growing tax bite

MARK JEWELL, AP Personal Finance Writer

Published 4:51 pm, Friday, February 15, 2013

This year's tax-filing deadline is a couple of months away, and many investors are beginning to review whether they made any rash moves with their portfolios to trigger potentially unnecessary tax bills. It's a good instinct to follow, because it can become a teachable moment on how to become a tax-savvy investor.

But it's perhaps more important now to be mindful of new tax law changes approved in the deal that lawmakers struck in January to avoid the "fiscal cliff." Those changes could have a big impact on taxes filed in 2014 and beyond, especially for those in the top income bracket. They'll pay higher rates, and will want to invest with a heightened sense of tax implications starting this year.

The rate increases are intended to help the U.S. get its fiscal house in order, but the medicine isn't entirely bitter. Historically low rates remain intact for investors in middle-income brackets, and the worst-case scenario rate hikes that were on the table during congressional negotiations failed to become law.

Another plus: The high uncertainty over taxes in recent years is largely gone. President Obama and congressional leaders continue to discuss raising revenue by capping or limiting some tax exemptions. But the rate levels in the Jan. 1 agreement to avert the fiscal cliff are expected to remain in place for the foreseeable future. There's no sunset date on the rates, unlike the Bush-era tax cuts approved in 2003.

Here are some considerations for investing in the new tax landscape:

1. TAXES ARE HIGHER, BUT STILL MODEST HISTORICALLY: In the year ahead, investors should focus on their tax rates for capital gains and dividends. In the middle-income tax brackets -- those with adjusted gross income of $72,501 to $223,050 for married couples filing jointly, and $36,251 to $183,250 for single filers -- the rate remains 15 percent on long-term capital gains. Those are the profits from selling such investments as stocks or funds held for at least a year.

The rate for capital gains and dividends has climbed to 18.8 percent for joint filers with more than $250,000 in income and $200,000 for single filers. That factors in a new 3.8 percent investment income surtax to help pay for Obama's health care overhaul.

The biggest hit will be felt by top-bracket investors -- those with adjusted gross income of more than $450,000 for couples, and $400,000 for individuals. They now pay 23.8 percent on long-term gains and dividends, including the health care tax.

2. SHORT-TERM GAINS, BIG TAX BITE: The distinction between a long-term capital gain and a short-term gain remains important for investors in the top brackets, because tax rates continue to be far higher for the latter.

Short-term gains are triggered by profits earned from a taxable investment held less than a year. They're taxed as ordinary income, like wages, and high earners now face higher income tax rates. Those in the top bracket now pay a steep 43.4 percent including the health care tax, up from 35 percent.

3. MUNI BOND ADVANTAGE GROWS: The rate also rises to 43.4 percent for income that top earners receive from taxable bonds, such as corporate bonds. As a result, those investors can realize a greater tax advantage than they could previously from investing in municipal bonds and muni funds, rather than in taxable bonds. Investors don't have to pay federal taxes on income from munis.